What is self-billing?
Instead of a supplier issuing a VAT notice in the standard way, self-billing is an arrangement that allows a customer to prepare the supplier’s invoice and forward it to the supplier complete with the VAT payment.
Any business can adopt self-billing, providing the supplier agrees to the request and both parties are VAT-registered.
What are the advantages of self-billing?
Self-billing is popular primarily because it makes invoicing easier. By allowing the customer, rather than the supplier, to determine the value of a purchase and the VAT due on it, this can be completed after the goods have been delivered or the services supplied and the precise details known.
Yes, there are some challenges you must overcome when carrying out self-billing.
If completed manually, self-billing typically comes with a high risk of errors and a weak audit trail. This is because the people involved may apply the wrong VAT rate, documents can be lost and the conditions for self-billing might be breached.
What are the rules?
For the customer…
As a customer, you are able to adopt self-billing if you meet the following criteria:
- Each supplier agrees to self-billing.
- Records are kept of each supplier that you self-bill.
- All invoices contain all the relevant information.
- Regular reviews of your agreements with suppliers are carried out.
Both the customer and the supplier are required to sign a formal self-billing agreement, which includes key details such as confirmation from the supplier that they will not issue VAT invoices for goods and services covered by the agreement, the supplier’s agreement they will inform the customer should they become unregistered for VAT and permission for the customer to issue invoices on the supplier’s behalf.
Self-billing agreements typically last for 12 months; upon expiry the customer must review it and ensure the supplier still agrees to the terms. Continuing to self-bill a supplier without their written agreement is an offence.
For the supplier…
As a supplier, if you wish to agree to a self-billing arrangement with a customer, you must:
- Sign and keep a copy of the agreement.
- Declare that you are happy to accept self-billed invoices issued by your customer.
- Agree not to issue any sales invoices of your own throughout the period of the agreement.
Remember the VAT figure state on the self-billed invoice you receive from your customer is your output tax. You are accountable for this so you should run checks to ensure each customer is applying the correct rate of VAT on each transaction. If a VAT rate has changed, you will need to make sure this is reflected in your latest invoices.
5 industries that can benefit from self-billing
Self-billing is already common in many industries as businesses come to realise the operational benefits it offers. If your business operates in one of the following five sectors, self-billing could be just right for your needs:
By using self-billing, car and vehicle manufacturers are able to calculate and submit invoices for the exact quantity of parts or raw materials they have consumed at regular intervals through the manufacturing process. These quantities can be multiplied by unit prices to generate totals on a customer-generated invoice.
- Grocery retailing
Some businesses in the groceries industry opt to use scan-based trading; a system that allows the supplier to retain ownership of goods until the consumer purchases them in store. At that point, a process to generate a self-invoice is launched. Data within the retailer’s system is used to calculate the invoice amounts. Self-billing is popular – particularly in North America – for its ease of use in determining and applying VAT to high-turnover items.
- Media and entertainment
The sale of digital goods is another area in which self-billing works well. Traditional billing for items – including e-books, music downloads, apps and video games – is difficult as there is no regular replenishment of products. Indeed, the supplier has no knowledge of what has been sold, when and to whom. Once a sale has been made, the supplier relies upon the retailer reporting the sales they have made – and it often makes sense to complete self-billing VAT as part of this.
- Consumer products
Manufacturers of consumer goods and food items operate within a complex supply chain involving suppliers of packaging, ingredients, raw materials and retailers. Similar to those in the automotive industry, those in consumer goods could benefit from self-billing during the replenishment process by using unit prices to calculate a self-generated invoice.
Similar to the industries we’ve already mentioned, construction relies on a complex supply chain in which it is easier (and potentially more accurate) for the customer to determine the value of the goods it has used only after they have been supplied.
How can we help you implement self-billing?
If you opt to carry out self-billing as a customer, it will be your responsibility to check your suppliers are legitimate businesses and registered for VAT. Our revolutionary Limelyte® Entity Manager tool automates this process, allowing you to validate up to 100,000 suppliers and their VAT registration details at once.
For more information on how our solutions can support your self-billing setup to ensure smooth automation and guaranteed accuracy, get in touch with our team today.